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New Aid for Fannie and Freddie

Just as the nation’s biggest banks repay their taxpayer lifelines, the government said Thursday it would offer significant new financial support to Fannie Mae and Freddie Mac, the beleaguered mortgage giants, no matter how badly they perform in the next few years.

The announcement came as the government approved cash compensation for the companies’ top executives of up to $42 million for their work this past year. The largest payouts will go to the Fannie Mae and Freddie Mac chief executives, who each will receive up to $6 million over two years, according to financial filings made Thursday.

The housing giants stumbled badly in the financial crisis after backing too many troubled loans. Late last year, the government put them into conservatorship, and since then they have provided most of the liquidity in the mortgage market, allowing homeowners to refinance and buy new homes. Now, announcing new long-term support for the companies, the Obama administration has effectively transformed them into arms of the government, using them to help carry out its mortgage modification programs.

The agencies have already used $112 billion of a $400 billion pledge from the Treasury Department to stay afloat, but investors have remained nervous about their future. To quell uncertainty, the government said it would remove the $400 billion financial cap for three years.

The lifeline would keep Fannie and Freddie from tumbling into a downward spiral of debt, but it effectively tethers the companies more tightly to the government, which already owns 79.9 percent of each. The Obama administration has said it will issue a plan on the future role of Fannie and Freddie in February.

The announcement “should leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis,” the Treasury said in a statement.

Both companies’ shares have been trading around $1 for more than a year. In October 2008, when they were put into conservatorship, the government prohibited them from issuing stock for compensation. But the Treasury Department was allowed to approve a change in that rule.

Executives at both companies will receive cash bonuses for their 2009 performance, with some of the payouts contingent, in part, on the companies providing liquidity to the housing market and helping to decrease the occurrence of foreclosures.

Photo

Michael Williams of Fannie Mae, top, and Charles Haldeman of Freddie Mac will each receive up to $6 million for two years.Credit
Top, Cade Martin/Fannie Mae, via Bloomberg News; Jeff Christensen/Reuters

The pay packages, approved by the Treasury and the Federal Housing Finance Agency, which oversees Fannie and Freddie, surprised some compensation consultants because the administration has promoted stock payments as a better way to reward executives over the long run. Some executives at banks like Citigroup and Bank of America were required to be paid upwards of 96 percent in stock this year, and Treasury officials praised Goldman Sachs this month when the bank said it would voluntarily pay its top executives stock bonuses only.

“This seems to me like a devious retreat,” said Kevin Murphy, a professor at the University of Southern California, who last summer advised the Treasury on pay issues. “There’s no stock in here, there’s no stock options, there’s nothing that appears to be tied to stock prices. It should make shareholders concerned.”

The executive bonuses at Fannie and Freddie follow a string of recent shifts by the government on its executive compensation policies. This month, Kenneth R. Feinberg, the Obama administration’s pay adviser, made several exceptions to his $500,000 cash pay cap to retain executives at companies like American International Group. He approved a hefty potential payout to GMAC’s new chief executive and another one to General Motors’ new chief financial officer.

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The pay packages for Fannie’s and Freddie’s top executives consist of three parts. For Michael Williams, the chief executive of Fannie Mae, and Charles Haldeman, the chief of Freddie Mac, it includes a $900,000 salary, $3.1 million in deferred payments in 2010 that are not dependent on performance and an additional $2 million tied to meeting certain goals.

The goals, though, could prove contradictory. The executives are supposed to focus on returning taxpayer money and risk management at the same time as they promote the administration’s modification and foreclosure prevention programs. Freddie Mac has stated in its financial statements that its focus on helping homeowners might not be in the best interest of shareholders.

Though Fannie and Freddie are not under Mr. Feinberg’s domain, the F.H.F.A. consulted with him about those companies’ payouts. With their shares currently of little value and their future existence uncertain, the agency settled on cash-only payouts spread out over time, according to a person briefed on the matter who was not authorized to speak publicly.

Mr. Murphy of the University of Southern California said that, to a certain extent, the pay packages showed the government could not rein in pay. “Ultimately when the government meets the market, the market wins,” he said.

Other compensation experts said the dollar amounts, while high for government work, were far lower than pay in the financial industry.

“It’s not egregious by any stretch of the imagination,” said Randy Ramirez, a compensation consultant with BDO Seidman. “This is pretty much a benchmark going rate to assume this kind of responsibility. That’s just where we are in the marketplace today.”

The F.H.F.A. said that the deferred payments to the executives were intended to replicate stock holdings. Spokesmen for Freddie and Fannie declined to comment.

A version of this article appears in print on December 25, 2009, on Page B1 of the New York edition with the headline: New Aid For Fannie And Freddie. Order Reprints|Today's Paper|Subscribe